[ihc-hide-content ihc_mb_type="show" ihc_mb_who="14,16,20,23,24" ihc_mb_template="1"] The OPEC+ decision doesn’t come as a big shock given the current market dynamics and shifting sanctions against Russia. Europe released their newest sanctions against Russia: “The measures would forbid the purchase of crude oil from Russia delivered to member states by sea in six months and refined petroleum products in eight months. Pipeline crude would be temporarily spared as a concession to Hungary and other landlocked countries, which rely on Russian supplies through the Druzhba pipeline. The sanctions package will also see Russia’s biggest bank, Sberbank, cut off the international payments system SWIFT. The same restriction also targets Credit Bank of Moscow and the Russian Agricultural Bank. The measures will be adopted once they are published in the EU’s official journal. “ The sanctions go a BIG step further and ban maritime insurance for Russian cargoes. This could eliminate up to 90% of all vessels from carrying Russian crude oil and productions. It removes all vessels under the International Group of Protection and Indemnity clubs. This is a huge problem because Russia and key trade partners (India and China) will have to source their own insurance for vessels. The insurance can come from Russia or India/China, but will the vessels risk the exposure? If the vessel has an accident, can they rely on the insurance coverage? Will they be sanctioned by other nations for carrying Russian cargoes shrinking their pool of potential suiters? The uncertainty of these policy shifts will impact the willingness of shippers to dip their toes in the water. There is still another 6 months to “figure out” what these policies mean, but it would be a big hurdle for Russian barrels to overcome. Russia has been relying more on ports to move cargoes around the world, and the limitations on insurance would hit hardest in the Artic, Baltic, and Black Sea ports. The Pacific is already using more Chinese vessels, so wouldn’t be the same type of hurdle. The updated sanctions could through a huge chunk of flow in question. The pipeline capacity was given a longer leash to enable landlocked countries to shift their supply chain, but I don’t see Hungry complaining with these rules regardless. They may have no choice based on volume (pressure requirements) in the pipeline. These new developments all happened as the OPEC+ meeting took place where they decided to increase production by 648k barrels a day each month for the next two months instead of 432k over the course of three months. The increase in allowed production will be spread across countries inline with previous adjustments. Many countries in West Africa haven’t increased production anywhere near the allowed levels because they can’t sell the reduced loading schedules. The issue is twofold: crude quality and “cheaper” options for their natural buyers (India and China.) Asia- especially China- has been purchasing discounted Iranian and Venezuela barrels, but now with sanctions, they have another huge option of purchasing steeply discounted cargoes. The other problem- refiners are incentivized to run as much middle distillate (diesel) as possible, and the heavier barrels yield the largest cut of middle disty. Yes- it costs more to crack heavier barrels, but the huge surge in crack spreads has easily covered the cost in hydrogen and natural gas. This is why we continue to see a huge surge in West African floating storage that will remain elevated. It is worth noting that WAF has achieved this level of floating storage with Nigeria producing at 1.49M barrels a day, Angola- 1.16M and Congo at 260k a day. Just imagine what it would look like if they were actually hitting their OPEC+ allotment. There are ways they could adjust the situation, which would be to offer a bigger discount to compete more aggressively against other cargoes in the market. It is unlikely a lower price would attract Asian buyers BUT it would absolutely bring European and American buyers. Typically, WAF cargoes start off the month at elevated prices that are slowly chipped away to find out where the best clearing price is for the month. West Africa Floating Storage The shift in crude exports is increasing the miles per ton and putting a record amount of crude in transit. This will remain a key backdrop as Russia sends more crude the “long way” to Asia instead of to neighboring countries throughout Europe. Global Crude Oil on the Water “As of Nov 2021, ~60% of Russian crude oil/refined exports were headed to OECD EU countries; in n anticipation of steep reduction of demand for Russian crude, discount of Urals to Brent has widened to record level of ~$35 from close to $0 at beginning of year.” The below chart does a great job of highlighting just how much crude is getting displaced and placed on the water. Between long sailing times and port congestion around the world, there will remain a record amount of crude on the water. 2020 clearly had a huge shift, but 2022 will see the levels remain elevated and take out even the 2020 levels as we progress through the year. Global Crude Oil on the water Floating storage remains elevated as congestion remains at ports (especially in China) and more product is left on the water. The timing will determine how big the numbers get because we will see more cargoes in transit for longer. This will increase crude oil in transit while temporarily drawing down some of the floating data. The elevated levels of storage remains in Asia and West Africa, but we are also seeing a bigger build up in the Middle East. Global Crude Oil in Floating Storage The Middle East has seen a steady rise of floating storage, which will drive what kind of OSP premium Saudi Arabia sets. The levels are moving in the wrong direction, and could drive a lower than expected increase in OSPs vs estimates. “Saudi Aramco may increase the official selling price of Arab Light crude for July sales to Asian customers by $1.50 a barrel from a month earlier, according to the median estimate in a Bloomberg survey of six refiners and traders. The OSP differential is expected to climb to a premium of $5.90 a barrel to the Oman-Dubai benchmark. Three oil majors and two European oil refiners are moving at least 6 million barrels of Abu Dhabi crude to their European plants, said traders. Abu Dhabi’s Murban, Das and Upper Zakum crude for July loading are likely to replace some Russian oil intake due to self-sanctioning, they said.” The adjustments in Russia vs Middle East flow could bring this floating storage, but this is also coming at a time that the Middle East is increasing production levels. The area is also seeing more refined capacity coming online that will consume additional crude locally but increase the amount of product exported into the global market. “Kuwait has started up the first of three units at its new Al-Zour oil refinery, set to be one of the world’s largest, and aims to reach full capacity of 615,000 barrels a day by the end of this year, according to a person familiar with the matter. Once the facility on the Gulf coast is working fully, it will boost the OPEC member’s refining capacity to around 1.5 million barrels a day, the person said, without disclosing the current throughput of crude. Al-Zour’s commencement has been delayed several times, in large part due to coronavirus restrictions. It comes amid a global refining crunch, exacerbated by sanctions on Russia following its invasion of Ukraine. Refined fuel costs have soared in recent weeks, with gasoline and diesel pump prices reaching record highs in the US.” Middle East Floating Storage The refined product market is showing a big shift in diesel vs gasoline. The diesel (distillate) market remains in a global shortage as gasoline is showing a global glut as driving demand softens considerably. With google searches for spending has dipped as well as travel-related searches also drop. This could be because people have already locked in their plans or the price of gasoline/airlines has put a pause on travel expectations… I would default to a little bit of both. U.S. driving demand remains at a pause- falling well below seasonal norms as the Holiday weekend didn’t drum up the normal increase in driving. U.S. gasoline demand was even below the 15-year average- that includes the steep drop in 2020- to give you an idea at how weak it is. U.S. Gasoline Demand The “shortage” in the U.S. remains lopsided with it all centered around PADD 1, which is attracting a huge surge of imports from Europe that sits near record levels (and at a record if we remove 2020). European Gasoline Storage Singapore storage on the other hand is at a record even when you factor in 2020. The levels of gasoline around the world will attract more product into PADD1, but the diesel story is vastly different. Singapore Light Distillate Storage The U.S. has a steep shortfall that is also grossly weighted to PADD 1, but it is much worse vs the gasoline story. PADD 1 Distillate Storage Distillate Storage in PADD 3 The goal remains trying to get distillate from PADD 3 into PADD 1, and we will see more imports from the Middle East and Asia into the Atlantic Basin. Europe and Singapore shortages remain across the board and will limit the amount of product available to come into the East Coast. As more Middle East refiners ramp up, we will see some additional diesel flow into Northwest Europe as well as from India. The loss of Russian diesel will be a longer-term impact when we review. Europe Gasoil Storage Singapore Middle Distillate Storage Refiners will continue to target the middle distillate cut, but when you create diesel, you inherently create gasoline (on average 1 barrel of diesel = 2 barrels of gasoline.) This will make the gasoline glut even worse as current prices prohibit the normal summer driving bump. It will also incentivize the runs of heavier crudes and leave some trapped in the market. Europe will keep pulling down more U.S. crude in the meantime to help replace Urals and to blend with heavier Middle East and WAF blends. We expect to see U.S. flows dip a bit, but still hold at about 3.5M a day in exports. Here is a quick interview I did on the backdrop of the crude market: As Russia’s foreign minister Sergei Lavrov visits Saudi Arabia before OPEC+ monthly meeting, do you expect any changes to OPEC+ plan on Thursday? In your view, are there any oil-related significance to his visit? Regarding end of year Russia wants to maintain their presence in the agreement and find a long-term path forward to be a part of OPEC. Russia was coming from a point of strength and was able to dictate terms on production schedule that were favorable to their portfolios. Their position on the global stage has weakened, and I think this was the first in a long serious of negotiations to maintain their status within the organization. Russia is also struggling with equipment and labor shortages driven by sanctions, and I am sure this was a big part of the conversation. Inventory of parts is dwindling, and they need to find ways to circumvent sanctions to keep operations stable. In your view, how will OPEC+ look like after the current production deal ends toward the end of the year when they go back to pre-COVID-19 production levels while EU sanctions on Russian oil imports kick in immediately after that? In other words, what changes are expected in January 2023 and thereafter? I believe that Russia will remain within the OPEC organization, but we will see their role be diminished. The Middle East nations will produce closer to their quota, but I expect a bigger jump in refined product exports as new facilities come online. There is a record amount of crude on the water (outside of 2020) driven by an increase in miles per ton and elevated floating storage around the world. Production in West Africa remains hindered as Asia purchases cheap crude from Iran, Venezuela, and Russia leaving WAF cargoes floating offshore at record levels. Nigeria, Angola, and Congo are not incentivized to produce at allotted levels given the difficulty they are having to clear even reduced loading schedules. Until we see these cargoes moved into the market, I expect West African nations to produce well below their quotas while Saudi Arabia and Kuwait export more product into the Atlantic Basin. Production will remain elevated out of the Middle East countries, but West Africa will continue to disappoint as Russia takes market share driven by steep discounts. Where do see oil prices heading in the second half of 2022? I think we see prices range bound at this point with the higher end hitting about $118 WTI with the downside at about $112. The global gasoline glut is growing with near record or at record levels around the world, which will weigh on the crude slate refiners run. The middle distillate shortfall will keep refiners active since the crack can carry a weak gasoline (light distillate) cut, but it will push refiners to run a heavier slate to maximize middle of the stack output and limit gasoline production. As these dynamics hit in July/August, it will put more pressure on crude pricing and shift it down to its previous range of $102-$108. I would say the second half of ’22 averages something around $103/$104. Does OPEC+ decision today single additional increases in September to compensate for the decrease in Russian oil exports? Yes, I think the Middle East nations will increase exports to supplement some of the lost Russian exports into the European and U.S. markets. Kuwait has also accelerated the completion of the Al-Zour refinery to capture the healthy spread in the Atlantic Basin refined product market as Russian diesel is displaced by sanctions. West Africa still has a large amount of floating storage they could sell into the NW Europe and U.S. markets, but they have been hesitant to be more competitive on spreads. As Asia purchases even more discounted Russian cargoes, Middle East and WAF crude will see an increase in exports into Europe and the U.S. [/ihc-hide-content] [ump-visitor ] To unlock the content you need a Premium or Enterprise Account! [/ump-visitor] [ump-logged-user ] This content is visible only for Enterprise Account! [/ump-logged-user]